Public sector workers in Birmingham and across the West Midlands could be paid significantly less than colleagues in the south for the same job, under proposals announced by the Chancellor.

George Osborne revealed plans to tear up national pay agreements as he admitted Britain’s debts were set to soar in a gloomy financial statement.

The measure would place public sector workers in the same position as private sector colleagues, who are already paid more in the south east and London, he said.

Mr Osborne warned the House of Commons that Britain could not escape the “debt storm” in Europe, where countries like Greece and Italy have faced financial crisis, and warned “if the rest of Europe heads into recession, it may prove hard to avoid one here in the UK.”

Despite the Government’s painful efforts to cut spending, Britain will need to borrow £127 billion this year, £120 billion next year and £100 billion the year after, he admitted.

Labour’s Shadow Chancellor, Ed Balls, said the Government was wrong to blame Europe and argued that the massive borrowing figures were caused by a failure to grow the economy.

Documents published by the Treasury also revealed that 710,000 public sector jobs will be axed by 2017 – but an estimated 1,700,000 private sector jobs will be created.

In more bad news for public sector workers, Mr Osborne said their average pay rise would be limited to one per cent, significantly below the rate of inflation, for two years from 2013. Their pay has already been frozen until then.

But there was also a range of spending announcements and help for industry designed to create jobs, funded partly by a £20 billion investment from pension funds.

Businesses in the Black Country will enjoy big tax breaks when they buy assets such as machinery or tools, with the introduction of a 100 per cent capital allowance.

New traffic management schemes, allowing motorists to use the hard shoulder and cut congestion, will be introduced on the M6 between Birmingham and Manchester. There will also be improvements to the A45 and A46 at Tollbar End, Coventry, and the Government pledged to support the planned diversion of the A45 near Birmingham Airport, allowing a planned runway extension to go ahead.

An extra £1 billion will be pumped in to the Regional Growth Fund, which provides grants to industry and has already helped firms such as Jaguar Landrover, and the Birmingham carmaker will benefit from a new planned tax credit for research and development.

Motorists will benefit from a decision to freeze fuel duty until August 2012, £50 million will be spent on trying to get young people into work or training and £380 million will be spent providing free education or care to a further 130,000 two-year-olds from poorer families.

Solihull MP Lorely Burt (Lib Dem Solihull) welcomed the measures, saying: ““This is very welcome news. With investment in High Speed Rail and now an extended runway at our airport, the West Midlands has strengthened its reputation as a fantastic place to do business, not just in the UK but internationally.”